Corporate & Commercial February 2012 Newsletter

Welcome to our first Corporate &
Commercial newsletter. The newsletter will be distributed quarterly
and will contain topical articles on legal issues and developments,
as well as news of our team.

This quarter we have included articles
on the following:

the impacts of carbon tax, including for consumers like you and
ourselves

ASIC's changes to financial requirements for responsible
entities

a Cornwall Stodart 'Success Story': 'RSEA - A complex
transaction'.

Last week we distributed an alert on
the (now commenced) Personal Property Securities Act 2009
(PPSA). Now that the PPSA regime has commenced,
it's time to get moving - or risk losing any interests you have in
personal property. Please click
here for the full article.

Please don't hesitate to contact us if
you would like more information on any topic, whether covered in
this newsletter or not.

Planning for the carbon tax

In less than five months, the Australian government's
controversial carbon pricing scheme will commence (please refer to
our earlier alert for more information). Yes, we're going to have a
carbon tax. No, you may not like it. But one thing is certain, it
will happen and we will have to deal with it.

By now, businesses should have identified their carbon exposure
and developed a carbon management plan to assist them in
safeguarding against increased costs and generating new income
streams.

For those businesses that haven't, NOW is the
time to act.

All businesses will be affected by the carbon tax in one way or
another. While only 500 businesses (Australia's largest polluters)
are expected to be directly liable under the scheme, the
introduction of a carbon price on 1 July 2012 will increase the
cost of carbon intensive inputs like electricity, petroleum and gas
that are used by most businesses.

So, what is the rationale behind the carbon tax and why
do we need it?

Australians generate more carbon pollution per person than any
other developed country. Most of this pollution stems from our high
use of electricity, which is mainly generated by burning coal. Some
of our most prosperous industries such as mining, farming,
deforestation and transport, also contribute.

The main policy rationale behind the carbon tax is to reduce
Australia's carbon pollution. The government believes that the best
way to achieve this objective is to place a price on carbon.

While the carbon price is not a tax on households or small
businesses, they will be impacted through the pass through of
costs. As large companies pay more to burn fuel, so too will
consumers for everyday essentials like electricity and gas.

This pass through of costs is fundamental to the effectiveness
of the government's policy rationale, which is focussed on bringing
about behavioural change in consumers like you. It is hoped that as
prices increase, consumers and businesses will take action to avoid
such costs and that this will eventually lead to a decline in their
carbon pollution.

How do I determine the impact on my
business?

Liable entities

Around 500 of Australia's largest polluters will be faced with
direct costs of the carbon price; that is, the obligation to buy
and surrender carbon permits. Covered sectors include: stationary
energy; waste; rail; domestic aviation and shipping; industrial
processes; fugitive emissions; and from July 2014, heavy on-road
vehicles.

Businesses in covered sectors need to determine whether they are
directly liable under the scheme. For those businesses that are
covered by the scheme, it is necessary for them to resolve how to
deal with this new liability. For large corporate groups, this
requires a consideration of how to allocate liability among various
entities in the group.

It is also important for liable entities to determine whether
costs associated with the scheme can be passed on to consumers (see
below).

Other entities

For the vast majority of businesses that are not liable
entities, the relevant impact will be indirect and will depend on
two main factors:

the amount of energy used in everyday processes and within the
supply chain; and

the ability to pass on increased costs to consumers.

The more energy intensive the supply chain, the greater the cost
imposed.

Businesses that rely heavily on carbon intensive inputs will be
forced to pay more for these products. In turn, these businesses
will need to develop mechanisms to cope with their increased
costs.

Some businesses may choose to reduce their usage of carbon
intensive inputs, while other businesses may try to pass these
costs on to their consumers.

So, all I have to do is increase my prices in line with
my increased costs and my business will be okay?

Wrong.

Businesses should not assume that increased costs can be
automatically passed on to consumers.

Existing contracts

The ability to pass on costs will depend heavily on the wording
of existing contracts.

Contracts should be thoroughly reviewed to determine whether
they provide for costs to be passed on.

Fixed price contracts are unlikely to provide for the pass
through of costs. However, some contracts may contain clauses that
indirectly permit carbon cost pass through. Businesses may seek to
rely on price review, change in law, change in tax, carbon price or
material change clauses to pass on costs. However, these clauses
are not an absolute safeguard and their effectiveness will depend
on their individual wording and interpretation and their ability to
operate under the carbon price scheme. For example, as the carbon
pricing scheme is not a 'tax' per se, but an emissions trading
scheme, some change in tax clauses may not be of assistance.

New contracts

When preparing new contracts, it is essential to consider carbon
pass through.

Businesses should determine the materiality of their carbon
costs and determine what costs are to be passed on to
consumers.

Clauses should be carefully drafted to ensure that they cover
all costs imposed under each carbon price scheme (there are many)
and do not result in price gauging (pricing goods much higher than
is considered reasonable or fair).

The role of the ACCC

Businesses should also be aware of the risks of passing on costs
to their consumers and the role of the ACCC in policing this
process.

The ACCC has been directed by the government to investigate and
monitor the impacts of carbon permits on prices in the hope of
safeguarding against any 'price exploitation'.

The ACCC will have the power to:

issue substantiation notices requiring proof of representations
made with respect to the impact of the carbon price and increased
pricing;

issue infringement notices; and

seek civil or criminal penalties.

What will amount to 'price exploitation' in this area is
uncertain and will require a level of judgement; however businesses
that exaggerate the impact on the carbon price and increase their
costs in an unreasonable or unfair manner will probably face some
interference by the ACCC.

As a result, you need to ensure that any price increases that
are alleged due to the 'carbon price' can actually be traced back
to the carbon price and justified.

The ACCC will also undertake an educational role, including
issuing guidelines about how it expects businesses to communicate
the impact of the carbon price on them and how they should reflect
the cost of carbon permits in their pricing.

What else do I need to consider?

Directors

Company directors have new legal duties under the carbon pricing
scheme.

In addition to fulfilling their general duty to act with due
care and diligence, company directors have a responsibility to
ensure that their companies implement strategies to manage
liability under the carbon pricing scheme.

In particular, company directors should ensure that their
company:

understands its liability under the carbon pricing scheme;

has appropriate measures in place to cope with any increases in
costs;

introduces or considers measures to reduce carbon
emissions;

educates its staff about compliance with the scheme; and

is aware of its obligations to report and make disclosures
about the scheme.

Company directors should consider seeking legal advice and
assistance in managing their obligations, as a failure to do so may
result in a breach of director's duties.

Listed companies

Under ASX Listing Rule 3.1, a listed company must immediately
disclose to the ASX any information that is expected to have a
material effect on the price of its securities. This continuous
disclosure obligation is just as applicable to the carbon pricing
scheme as it is to any other major transaction or business
change.

The carbon pricing scheme is likely to increase the cost of
inputs and affect profits. As a result, listed companies will need
to ascertain the effect of the scheme on financial forecasts.
Similarly, they need to consider the general effect of the carbon
pricing scheme on their operations; for example, will all planned
projects proceed? Will processes need to be re-evaluated? Will
product lines need to change?

Several listed entities have already made disclosures about how
they expect the carbon pricing scheme to effect their business
(both in positive and negative ways).

Listed entities that have not made disclosures should consider
their obligations to do so, because a failure to make appropriate
disclosures may attract sanctions under the Corporations Act.

Maybe it will affect my business after all, what should
I do now?

The development of a carbon management plan is critical to the
ability of your business to understand its carbon footprint and
develop effective systems to safeguard against increased costs and
generate new income streams.

A properly formulated plan should enable your business:

to understand its carbon exposure;

to reduce costs;

use carbon to leverage and increase revenue streams; and

develop new revenue streams.

Cornwall Stodart can assist you in developing and implementing a
carbon management plan that:

identifies potential carbon exposure;

reviews contracts to determine which costs can be passed on to
consumers;

New financial requirements for Responsible Entities

New financial requirements for Responsible Entities
commencing on 1 November 2012 represent a signficant additional
financial and administrative burden for many Responsible Entities
and should not be underestimated. The time to implement a plan to
ensure compliance is now. Directors should not rely on a
declaration by ASIC that it may, on a case-by-case basis, consider
granting temporary relief or a further transition of 12 months
where a Responsible Entity can demonstrate extenuating
circumstances.

The hurricane

Managed Investment Schemes (MIS) have long been
plagued by skepticism and doubt. Critics have frequently questioned
the structure and level of financial resources available to
Responsible Entities to meet operating costs throughout the life of
the funds which they manage. Despite these concerns, many funds
experienced significant growth in assets under management. In the
years leading up to the GFC, there was unprecedented growth in the
number of registered schemes in Australia. However, following the
collapse of several managed investment schemes across the property,
finance and agribusiness sectors and a freeze on unit redemptions
during the height of the GFC, ASIC conducted a review of the
legislative framework and, in particular, the financial
requirements in place for Responsible Entities. The result was
Class Order CO 11/1140.

The winds of change

The new financial requirements which take effect on 1 November
2012 introduce a new section (912AA) into the Corporations
Act2001 (Cth). The reforms aim to ensure that
Responsible Entities have 'adequate resources to meet operating
costs' and that their motives are adequately aligned with
investors' interests.

The long and winding road

The new measures address four key areas that should ensure
Responsible Entities have sufficient financial resources and risk
frameworks in place to successfully manage schemes:

1. Cash-flow requirements

Responsible Entities will be required to prepare 12-month
cash-flow projections which must be approved at least quarterly by
directors. All calculations and assumptions upon which the
projection is based must be clearly documented.

Responsible Entities must update the cash-flow projection when:

the cash flows cease to cover the next 12 months; or

there is a material change; or

the Responsible Entity has reason to suspect that an updated
projection would show that they do not have access to sufficient
resources to meet their liabilities or do not hold the necessary
proportion of Net Tangible Assets (NTA) in cash or
cash equivalents.

2. Net Tangible Asset requirements

Responsible Entities must hold NTA at the greater of:

$150,000;

0.5% of the average value of scheme property of the registered
scheme(s) and investor directed portfolio services
(IDPS) that the Responsible Entity operates
(capped at $5 million); or

10% of the average revenue of the Responsible Entity (with no
maximum).

3. Liquidity requirement

There are two components to the liquidity requirement:

Responsible Entities must hold as cash or cash equivalents, the
greater of:

$150,000; or

50% of the NTA requirement that is required to be held.

The NTA required to be held must be in liquid assets.

4. Audit opinion

The Responsible Entity must lodge with ASIC an audit report
made by a registered company auditor for each financial year and
any other period that ASIC directs.

The winner takes all

The new requirements follow a lengthy consultation period and
were largely expected by the funds management industry. Despite
this, they will have a significant impact on many existing
businesses of Responsible Entities and the capital and liquidity
levels that they must maintain. This is likely to shake up the
industry by pushing smaller players out and encouraging
consolidation at the top end. ASIC hopes this will improve investor
confidence and result in greater protection of investor
funds.

The changes present a number of challenges for Responsible
Entities. They introduce a new level of complexity and greater
accountability. Responsible Entities will need to review their
financial models and consider whether existing arrangements within
group companies (for example, cross guarantees) and other
contractual arrangements are appropriate under the new regime.

Cornwall Stodart is ready to assist Responsible Entities to
undertake this task.

RSEA - A complex transaction

'This was a
complex transaction involving a number of parties and stakeholders
- and a tight timeframe. Our team, along with KPMG Corporate
Finance, worked hard under pressure to complete the transaction on
time, and ensure we negotiated and facilitated the successful sale
of the majority interests in the specialist mining and construction
services company, RSEA Pty Ltd, to Champ Private Equity's
mid-market unit, Champ Ventures.'

Gid
Meltzer, Partner, Corporate & Commercial

Enhancing our clients'
succeess

Of our role in the sale, Mr Chizik
(Managing Director of RSEA) said: 'Our advisors managed this
transaction with proficiency and skill. Cornwall Stodart's
proactive and commercial approach was instrumental in facilitating
a smooth sale and restructure transaction. With this approach and
their proficiency combined, Cornwall Stodart demonstrated the value
that experienced and commercially oriented lawyers can bring to a
complex transaction.'

Our client

Our clients were the owners of RSEA,
including the Spotlight Group as majority owner and senior
executives of RSEA.

RSEA is Australia's largest specialist
safety retailer of hard hats, high-visibility wear and site signs.
A Melbourne-based business, it services the mining, infrastructure
and construction industries, has annual revenues of $65 million and
17 super stores, 8 hire depots, and 6 distribution centres across
Australia and New Zealand as well as an online shop.

Their ambition

The owners asked us to advise on and
undertake the documentation and negotiation of the sale transaction
including certain restructure arrangements, which were designed to
protect and enhance the interests of the senior managers who retain
a minority stake in RSEA along with the buyer, Champ Ventures.

The Spotlight Group's aim was to sell its entire holding in
RSEA, while the remaining minority interest holders, including Mr
Chizik, wanted to retain a slightly reduced stake in the company
following the conclusion of the sale.

Gideon Meltzer, Partner, Corporate & Commercial

Gideon specialises in corporate and commercial law and taxation.
He has over 19 years' experience in a wide range of transactions
and disciplines both in private practice and as an in-house counsel
and executive of ASX listed companies.

Gideon's expertise extends to the implementation of legal advice
in a corporate environment and translating company policy and
legislation into business strategies to improve awareness,
transparency and governance. He has successfully engaged with
government, lobbyists, regulators and industry bodies to implement
structural and legislative changes at industry and corporate
levels.

He also advises on carbon tax and its impacts on businesses of
all sizes, as well as on individual consumers. Our Revenue Law team
regularly consults with Gideon on other taxation related matters.
In addition he advises clients on the (now commenced) Personal
Property Securities Act 2009, including the steps they need to
take to secure their interests in personal property.